Sunday, January 20, 2013

Obama 2.0

With the inauguration of President Obama's second term upon us, we thought we'd take stock on the governance of his truly unorthodox administration. First, let's define unorthodox. Throughout the 20th Century US Presidents have been moderates, either moderately liberal in the character of Jimmy Carter and Bill Clinton or moderately conservative in the policies of George Bush senior and junior.

Barak Obama, however, most would agree breaks the mold and sets a new direction of extreme ideology for America. Many of course support this vision, as evidenced by his solid victory last November over his moderate challenger, Mitt Romney. Be that as it may, it would be hard to argue that Obama is a centrist or one who is seeking to lead by unifying America across political lines. You may love him, you may hate him, but by now everyone understands him.

Obama speaks extensively about equally. He speaks about the great and growing divide between the rich and the poor, income inequality, tax policy and his vision of fairness. Supported by uber-wealth and self-effacing Warren Buffet, he argues that America should put an end to tax breaks, low tax rates that enable Mr. Buffet to a pay lower tax rate than his secretary. After all, let's be fair about this.

It's inarguably true that income disparity has grown in America, a subject which we've written about before. It's also patently clear to everyone by now that President Obama is determined to rectify this problem. The much herald fiscal cliff was resolved weeks ago with no expenditure increases and substantial tax increases - win/win you might say for the Democrats.

And so we ask, what is likely to come of all this new tax policy? Well, as anyone who is paying attention learned quite readily from the tax returns of Mitt Romney and sifting through the rhetoric of Warren Buffet, the truly rich amass a very small fraction of their wealth through ordinary income. Despite all the populist banner waving of Buffet, this is the reason why his effective tax rate is lower than his secretary. It's not a mistake, it's not the unfairness of US tax policy and it's certainly not by accident.

Thus, the recent and seemingly relentless effort to raise taxes on the rich has two fundamental flaws. First, the ultra rich grow their wealth only modestly by current income (and therefore higher tax rates have only minimal impact upon their wealth) and two, any greater tax revenue that the government derives from higher taxes does little to improve the lives of the middle class. That is the subject perhaps of another blog, but there is zero evidence that government deploys greater tax revenue to reduce taxes on the middle class. Rather, greater tax revenue simply grows the size of government. You see, there are actually three parties at the table, not two. And the government has its own needs.

But if tax rates go up certainly someone must lose? This is correct. But it's not the ultra wealthy billionaires who have more than enough to go around. These people by design have minimized their ordinary income (Warren Buffet, of course, included). The group who loses the most is the aspiring affluent class, the upper-middle class who has over achieved in their aspiration to become wealthy.

It is this group, more than any other who is at the greatest risk for adversity under the Obama administration. The problem with redistributing wealth through tax policy is despite all our political hand wringing and teeth mashing, America has never found a way to confiscate existing wealth. This leaves the far left perplexed and frustrated and forced to settle for lowering the living standards (i.e. limiting inequality) not of the truly wealthy, but of those who aspire to be.